Biotech Values

[DewDiligence]

Market: Healthcare Bill=Higher Profits for Big Pharma

[PFE, GSK, AZN, BMY, and LLY each rose 1-2% today, which is a pretty big daily move for these stocks. My view, FWIW, is that the net effect of the healthcare bill for Big Pharma is a slight negative relative to the status quo, although it is unquestionably much better for Big Pharma than what *might* have been enacted.

MDT, the world’s largest medical-device company, was up 2.3% today, which is somewhat surprising given the steep new tax on medical devices in the healthcare bill.]

http://www.reuters.com/article/idCNLDE62L1IT20100322

›Volume gains sweeten US pill for drugmakers

Mon Mar 22, 2010 4:41pm EDT
By Ben Hirschler

LONDON, March 22 (Reuters) - Global drugmakers face a hit to earnings from 2011, as they are forced to chip in to help pay for U.S. healthcare reform, but will benefit in the long run as millions more Americans become customers for their medicines.

The future promise lifted stocks in major drug companies on both sides of the Atlantic on Monday, after U.S. lawmakers gave final approval to a sweeping healthcare overhaul over the weekend.

Big Pharma will provide somewhat more in savings than the original $80 billion agreement under the latest version of healthcare reform, but the bill passed by the U.S. House of Representatives creates 32 million more customers for the industry's products.

Crucially, the government will not impose drug price caps [i.e. Medicare will not be empowered to negotiate pricing with drug companies].

"The amount they are paying, essentially in a tax, over a five- to 10-year period is potentially more than offset by the increased volume that they have coming in," said Ben Yeoh, an industry analyst at Atlantic Equities.

"It looks neutral, within forecast error," he said. "There's relief that something has got through that drugmakers can live with."

Deutsche Bank analyst Barbara Ryan said the reforms would be "a modest negative" for big drugmakers, with discounts and other costs crimping industry revenue "by about 3 percent, which is fairly manageable." [I concur with Ms. Ryan.]

"Given that reforms are inevitable, they're certainly constructive given the range of (other) scenarios," Ryan said, noting: "They do not contain onerous language that could have led to controls on pricing."

Ryan said Pfizer Inc <PFE.N> and Merck & Co Inc <MRK.N>, which last year bought smaller rival drugmakers Wyeth and Schering-Plough, respectively, will enjoy years of merger-related cost savings and other advantages that make them best able to offset any negative impact from the healthcare reforms.

Shares of both Pfizer, the world's biggest drugmaker, and Merck gained nearly 2 percent in afternoon trade. European companies GlaxoSmithKline Plc <GSK.L> and AstraZeneca Plc <AZN.L>, both heavily reliant on U.S. sales, posted gains of less than 1 percent, amid a 0.9 percent advance for the NYSE Arca Pharmaceutical Index of large U.S. and European drugmakers.

Sanofi-Aventis SA <SASY.PA> was an outlier, falling slightly following a setback for its heart drug Multaq in France.

Morgan Stanley analysts said the reform package would depress earnings per share at European pharmaceutical companies by up to 2 to 3 percent in 2011.

But this would be counteracted by a sharp increase in the number of insured patients and enhanced revenues from the Medicare program for the elderly, the brokerage said. Drugmakers are unlikely to revise long-term earnings outlooks on the back of the news, it added.

ENDING UNCERTAINTY

Under the complex deal hammered out in Washington, the drugs industry will have to pay fees of $2.5 billion from next year -- rising to a peak of $4.2 billion in 2018 -- and provide discounts to help ensure Medicare coverage [i.e. to fill the so-called donut hole].

Savvas Neophytou, an analyst at Panmure Gordon, put the cost to the sector at between 1.5 and 2.2 percent of EPS per year for the first five years, but said the end to uncertainty should help sentiment.

"There's a sense that if no health reform had passed this time around, then everything would have got a really big kicking in three or four years time because, inevitably, something had to give," said Jack Scannell, an industry analyst at Sanford Bernstein.

Lawmakers also rejected an initial plan to end lucrative "pay-for-delay" settlements between brand-name and generic drugmakers -- a win for both groups of manufacturers. [These settlements will continue to be evaluated by the FTC on their individual merits rather than becoming unconditionally illegal.]

The biotechnology industry, too, has reason to be thankful that the legislation was not worse. A big fear for biotech investors had been that government would give generic alternatives a fast route to the market. In fact, makers of biotech drugs like Amgen Inc <AMGN.O> and Roche Holding AG's <ROG.VX> Genentech unit will still have a 12-year period of exclusive sales before facing competition from generic rivals. [However, this provision is much less consequential than many investors think; it comes into play only when someone wants to commercialize a knockoff of a biologic that lacks US patent protection.]‹